by Michael V. Coyle, JD*
In a Final Offer Selection (“FOS”) arbitration, the arbitrator is called upon to choose between the two “final offers” put forward by the parties to the dispute. The arbitrator has no jurisdiction in a FOS arbitration to modify the offers presented or take parts of one or the other in fashioning the award.
In theory, at least, FOS requires the parties to moderate their positions and eliminate any “extreme” proposals from their final offer out of fear that their offer will be rejected by the arbitrator.
The initial debate in FOS interest arbitrations in the labour context often concerns whether the arbitrator is required to chose between the final offers based on which proposal most closely resembles the deal that the parties would have reached had they been able to negotiate a settlement themselves (“replication”) or whether the arbitrator can look “more broadly at the relative reasonableness or unreasonableness of the competing final offers” (“reasonableness”).
The weight of Canadian authority clearly favours replication as the guiding principle in FOS interest arbitrations, as it is in non-FOS interest arbitrations in the labour context, where the parties have been unable to reach a Collective Agreement through normal bargaining, although the debate still rages.
In a recent (November 2, 2012) Manitoba case, Arbitrator Arne Peltz dealt with an FOS interest arbitration where (in a reversal of the norm, perhaps) the Employer favoured replication and the Union argued in favour of reasonableness.
After carefully canvassing the authorities and the arguments of both sides, Arbitrator Peltz put it this way in his award:
In my view, replication remains the governing principle, recognizing that the essence of FOS is a stark choice between two positions, neither of which may necessarily reflect the arbitrator’s view of a replicated collective agreement. In such case, the FOS arbitrator should select the offer which better replicates the objective result under reasonable collective bargaining. The criteria ordinarily utilized in interest arbitration remain relevant. This conclusion is consistent with the arbitral authorities cited by both parties …
And a few paragraphs later:
Considering the entrenched role of replication theory and all the authorities cited above, I cannot accept the Union’s formulation based on pure reasonableness, or stated another way, the “less unreasonable” test. The touchstone of interest arbitration remains as always – objective analysis of prevailing terms and conditions in relevant labour markets, consistent with labour relations realities. Nevertheless it was apparent that in addressing “reasonableness”, [the Union] was dealing with many of the same issues raised by [the Employer] under the guise of replication, so the parties were not so far apart, even on governing principles. Subjective fairness in the eye of the beholder is not a proper arbitral approach but certainly, as stated in the UMFA award, supra (at para. 8), “In the final analysis, an arbitrator must adopt some standard of reasonableness.”
It remains an open question in non-labour FOS arbitrations, which are of increasing interest for settling private disputes in the business community, as to whether the commercial arbitrator must adopt “replication” or a “reasonableness” standard in FOS arbitrations.
In my view, the arbitrator in non-labour FOS cases should seek the views of the parties on that issue very early in the proceeding and encourage them to reach agreement on it at the outset. Failing agreement, and after hearing the parties on that point, the arbitrator should rule on that question before the hearing commences on the merits.
*Michael Coyle is an experienced labour lawyer and a neutral arbitrator in both labour and non-labour cases based in Kentville, Nova Scotia. Information and opinion expressed in this article is meant for general interest only and is not a substitute for legal advice about your own situation. Michael can be reached by email at email@example.com For more information on Final Offer Section and Private Arbitration, visit his website at www.michaelcoyle.ca
©Michael V. Coyle, 2013